Question

Suppose Rocky Brands has earnings per share of $2.26 and EBITDA of $31.2 million. The firm also has 4.8 million shares outstanding and debt of $120 million (net of cash). You believe Jared's Outdoor Corporation is comparable to Rocky Brands in terms of its underlying business, but Jared's has no debt. If Jared's has a P/E of 13.4 and an enterprise value to EBITDA multiple of 7.3, estimate the value of Rocky Brands stock using both multiples. Which estimate is likely to be more accurate?

Answer 1

The estimated value of Rocky Brands stock using Jared's P/E ratio is $30.284 per share and using Jared's EV/EBITDA ratio is $22.45 per share. The EV/EBITDA multiple is likely more accurate as it accounts for the company's debt level.

Step-by-step explanation:

The question is asking to estimate the value of Rocky Brands stock using price-to-earnings (P/E) and enterprise value to EBITDA multiples from a comparable company, Jared's Outdoor Corporation. To do this, we'll calculate the value of Rocky Brands using both these multiples and determine which estimate is more accurate.

To use the P/E multiple, we multiply Rocky Brands' earnings per share (EPS) by Jared's P/E ratio: $2.26 (EPS) * 13.4 (P/E) = $30.284 per share. Now, to calculate value using the enterprise value (EV) to EBITDA multiple, we multiply Rocky Brands' EBITDA by Jared's EV/EBITDA ratio: $31.2 million (EBITDA) * 7.3 (EV/EBITDA) = $227.76 million for the enterprise value. Then, we subtract the net debt of Rocky Brands to find the equity value and divide by the number of shares: ($227.76 million - $120 million net debt) / 4.8 million shares = $22.45 per share.

Since every company's capital structure is unique, the EV/EBITDA multiple is often more accurate because it takes into account the company's debt, providing a clearer picture of the company's overall value compared to just the P/E ratio.